Capital Budgeting: NPV & IRR project analysis

Question

A firm has the following investment opportunities:
Investment NPV IRR
Project A $150,000 $30,000 14%
Project B $125,000 $20,000 11%
Project C $100,000 $25,000 13%

If the cost of capital is 10% and the capital budget is limited to $280,000, which project(s) should the firm undertake?
a. project A and project B
b. project A and project C
c. project B and project C
d. project A

Answer 1

Does each project represent money paid out, money received, or a combination of both? The cost of capital is given, the capital budget limit is given; however, the question does not give cash inflows (actual or projected) expected from each investment ..

 

10% : cost of capital

 

NPV (Net Present Value) is calculated by adding the initial investment (cash expenditure) to the present value of the anticipated future cash flows ..

If NPV is positive, asset value is increased..

If NPV is zero, asset value is not changed..

If NPV is negative, asset value is decreased..

  

 

IRR (Internal Rate of Return) measures the rate of return for a series of future cash flows over time : money paid out (negative), money received (positive)..

If IRR is greater than the expected rate of return, the investment is positive..

If IRR is equal to the expected rate of return, the investment is indifferent..

If IRR is less than the expected rate of return, the investment is negative..

 

 

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